There are numerous tax exclusions and exemptions that frequently affect our clients. Each year the Internal Revenue Service evaluates and often adjusts these to account for inflation.
When it comes to estate planning, the most important of these exclusions and exemptions are the annual gift tax exclusion, the lifetime estate and gift tax exemption and the generation-skipping transfer tax exemption.
This article briefly summarizes these common exemptions and exclusions, the IRS adjustments to them, and what the 2023 adjustments mean for your clients.
The Annual Gift Tax Exclusion
The annual federal gift tax exclusion — commonly referred to as the "annual exclusion" — is the amount that a taxpayer may gift to another individual without incurring gift tax or depleting the taxpayer's lifetime gift and estate tax exemption, which is $12.92 million in 2023. The 2023 annual exclusion amount will be $17,000 (up from $16,000 in 2022). The annual exclusion applies to gifts of $17,000 to each donee or recipient per calendar year.
This means that a parent may gift $17,000 per child, or any other donee, without being required to report the gifts on a gift tax return (Form 709) and without using any of their unified credit. Additionally, since each individual may take advantage of this exclusion, a married couple may gift up to $34,000 to each donee per calendar year without using any estate or gift tax exemption.
There are four types of gifts not subject to gift tax: gifts to political organizations, gifts to certain exempt or charitable organizations, gifts that qualify for educational exclusion (such as tuition payments) and gifts that qualify for medical exclusions.
